Running the Numbers: Why Newspapers Are Screwed

It's easy to say that the New York Times and other newspaper companies are screwed, but sometimes it helps to actually run the numbers. Do you know why they're screwed? It's actually not the cost of paper, ink, trucks, printing plants, and other physical distribution expenses. Rather, it's the cost of content creation.

Senior New York Times reporters believe they are underpaid, and, relative to other highly educated folks at the peak of their professions, they sure are. But relative to the online revenue they generate, those talented reporters, columnists, editors, and researchers actually cost a fortune.

Newspaper content generates way more revenue in the physical world than it does online, because offline it can be packaged with classifieds and display ads and actually sold. In the online world, meanwhile, it has to be given away, and because classified ads are now run by classified sites and newspaper sites are only one of dozens of places where people get news, the advertising opportunity is comparatively tiny.

How tiny? Compete.com says the monthly reader base of NYTimes.com is about 7.5 million people. Offline circulation, meanwhile, is about 1.1 million. If we assume that the ratio of offline/online revenue at the
Times Company is similar to that for the publication itself, the 7.5 million online
readers generate 10% of the publication's revenue, and the 1.1 million offline subs generate 90%. Offline circ and ad revenue are both declining. So let's think about what might happen as these trends continue.

Specifically, let's pretend that, tomorrow morning, every print reader stops buying the paper, and, instead, reads it online. To be safe, let's further assume that each offline "subscription" actually encompasses two or three readers. In other words, let's pretend that, tomorrow, print circulation goes to zero, and online readership jumps by 2.5 million. What would happen to the business?

The company would eliminate paper, distribution, printing, and all other physical production costs.

Content creation costs would stay the same. (The site would have to pay the freight for all the content it now gets for free).

All print revenue--ads and circulation--would vaporize.

No, no, you say, the latter assumption is absurd. By the time print papers disappear, that $55 billion-plus of annual newspaper advertising will all have moved online, so the companies will be fine. Yes, the advertising will have moved online. But, no, newspapers won't be fine. Why not? Because only a small fraction of that $55 billion will flow to newspaper sites as opposed to eBay, Monster, Yahoo, Google, et al. We can quibble about the exact percentage, but just for kicks, lets pretend that, if the paper were suddenly eliminated, 25% of NYT's offline revenue would flow to NYTimes.com.

With these assumptions, we can make the following adjustments to the NYT's Q2 numbers. (The calculations and assumptions are laid out in more detail on this page).

REVENUE:

Cut offline revenue to zero

Boost online revenue by 33% to account for increase in online readership

Boost online revenue by 25% of offline revenue under assumption that some will follow online.

COSTS:

Cut "raw materials" costs to zero.

Cut "other" production costs to zero, under assumption that they are ALL print-production and distribution related (which they probably aren't)

Reduce "wages and salaries" by 25%, under assumption that some are print-production and distribution related (which is probably too big a reduction)

Revenue drops by more than half, 40%-50% of employees get fired, and the company still loses money. Using the NYT's Q2 numbers and these assumptions, for example, revenue would have dropped from $789 million to $285 million. More importantly, EBITDA (earnings before interest, taxes, depreciation, and amortization) would have dropped from $118 million to -$64 million. Which means that management would just be getting ready to fire a few hundred more people.